International Finance Discussion Papers

A Simple Simulation Model of International Bank Lending Henry S. Terrell and Robert S. Dohner 1987-307  (March 1987)

Abstract:  The paper develops a simple simulation model of international bank lending to test the extent to which targeting of fixed shares in the stock of total bank claims on a borrower can make lending flows unstable. The model is based on three distinct types of lending strategies: potentially volatile lending by one group of banks with limited long-term commitment to international lending; the targeting of a given share of the total lending market; and lending based on an assessment of the borrower's creditworthiness.

The results of the model's simulations suggest that lending flows can become quite unstable if more than one-half of international bank lending is predicated on the maintenance of market share. The model also indicates an ambiguous role for market information in preserving stability. To the extent that improved public information about the lending activities of banks causes more banks to target market share, such information can result in market instability. However, under a rational expectation version of the model, if the increased information about bank lending behavior is used by some banks to improve their forecasts of the reactions of other banks it can serve to stabilize the system.

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